Hertz: There’s No Such Thing as a One-Way Trade

By

Ben Levisohn

Aug. 17, 2017 11:49 a.m. ET

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If any stock looked like a sure short, it might have been Hertz Global Holdings (HTZ). With the car-rental market under pressure from Uber and its ilk, used car prices falling, and management a mess, the stock had dropped 60% this year through June 21. Since then, however, shares of Hertz have more than doubled.

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What's behind the massive rally? While noting that four legs of the bear-case on Hertz "may have been debunked," Morgan Stanley's Adam Jonas and team argue that "everyone we speak to is bearish" on Hertz. They explain:

The level of investor sentiment surrounding the stock over the past few months has been profoundly negative. We'll spare you the details, but it's been uniformly very bad sentiment. We have had discussions with an unusually broad range of investors representing all different flavors of the capital stack from all genres of institutions with different time horizons and it seems HTZ has captured the market's desire to find an instrument that reflects high levels of risk in the used car market and in auto credit and secular concerns. For an investor who wants to express a negative view on used car values and/or the health of the auto ABS market, there is a dearth of instruments with which to express such a view. The 2 US publicly traded car rental firms were seen as easy targets, particularly HTZ given its well-known operational issues, elevated debt levels, and debt maturity profile. Over the past 2 months, however, we think investors must acknowledge that there have been developments that have potentially (if only temporarily) challenged the very well known and highly consensual bear case for HTZ.

So is it time to buy Hertz? Not quite. Jonas stands by his Equal Weight rating, arguing that there are both "idiosyncratic risks leading to highly adverse equity outcomes" but also that it could stage an "earnings recovery vs very low expectations."

Shares of Hertz Global Holdings have gained 1% to $19.11 at 11:42 a.m. today, while Avis Budget Group (CAR) has declined 0.2% to $33.87.

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